10 things direct-sales marketers won’t say

From Amway to Herbalife, pulling the lid off multilevel marketers.

By

KelliB. Grant

Omer Hoffman

1. “You’d do better slinging french fries.”

Even if you don’t recognize the jargon used to describe their business, there’s a good chance you’ve encountered reps from direct-sales or multilevel-marketing companies before — possibly in your own living room.

Companies using this model hire people to peddle everything from toys to nutritional supplements to utilities, through parties and solo demonstrations. Sound familiar? The industry encompasses well-known brands like Avon,
AVP, +2.90%
Tupperware,
TUP, +0.36%
Herbalife,
HLF, -1.14%
and Amway. Salespeople earn commissions on their sales, and in many cases, on those of new salespeople they recruit. As Robert FitzPatrick, president of consumer-watchdog Pyramid Scheme Alert, puts it, multilevel marketers “sell not only the lipstick — they sell the business opportunity.”

Is Herbalife a pyramid scheme? Debate swirls

(4:42)

Herbalife, a direct seller of protein shakes and other products, has a cheerleading sales culture that has weathered a string of assaults from Wall Street and naysayers. Steven Russolillo reports on Markets Hub. Photo: Bloomberg.

And business is booming: U.S. sales totaled nearly $30 billion in 2011, up 4.6% from 2010, according to industry group the Direct Selling Association. Indeed, during a poor economy, it’s not unusual for the direct-sales business to perform well, says DSA spokeswoman Amy Robinson. Individuals looking for extra income are drawn in by the promise of potential earnings, such as those advertised on Avon’s sales site: “Choose to work as little as 20 hours a week — and you’ll probably earn more than from a ‘regular’ part-time job.”

But the businesses aren’t without controversy. In December, hedge fund manager Bill Ackman went public with a $1 billion short against direct-sale supplement company Herbalife, alleging that the company relies on recruiting new representatives — not product sales — to profit. Herbalife CEO Michael Johnson said in a statement at the time that Ackman’s accusations were an attempt to manipulate Herbalife stock. The Federal Trade Commission is reportedly investigating Herbalife. (See Herbalife slumps on reports of federal probe.)

High sales totals and flashy ads don’t reflect the reality that most salespeople earn very little, says Prashant Malaviya, an associate professor of marketing at Georgetown University’s McDonough School of Business. In fact, says FitzPatrick, “more than half of the entire commission payout is transferred to the top 1%.” Robinson says the divide is less extreme, and more about effort expended: 90% of salespeople work part-time, while the top sellers make direct-selling their full-time job.

Would-be sales reps hoping to get some idea of their earning potential can try looking for earnings reports on the companies’ websites, say insiders. Nutritional supplement purveyor Isagenix, for instance, reports that its “associates” (sellers who have no recruits) earned an average income of $197 last year. But since not many companies post such reports, Malaviya suggests doing a little math: Divide a company’s annual revenue by its number of salespeople, and the result is a rough estimate ofper-salesperson earnings. Of course, he notes, that figure doesn’t take into account the company’s cut of sales (often 50%), or other expenses a seller might incur.

For the direct-sales industry as a whole, with its 15.6 million sellers, following that math results in estimated annual sales of $1,914 per seller. The DSA’s Robinson says that calculation fails to correct for the many salespeople who only “sell” to themselves. The median annual income for salespeople, she says, is $2,400. (FitzPatrick, in turn, says the DSA’s figure is inflated.)

Even at $2,400 a year though, critics argue, the numbers don’t give a typical part-time job a run for its money. After all, a McDonald’s cashier could make as much in a year, working just six hours a week — and that rate isn’t contingent on the number of fries he or she sells.

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